It almost seems like it might be (hopefully, possibly) if not the end, at least the beginning of the end of our days of being dogged by pandemic panic. Please, God. Hope springs, facing forwards etc and this Brief is packed with useful, normal advice and insights for the day to day job of governing credible, successful NGOs.
There is something of a governance focus in the Brief (and don’t glaze over or think it will be boring!) Some practical insights, and possibly controversial views, follow. So keep with us for a bit- you will be rewarded as we deal with:
- “EX OFFICIO”- what does it mean and is it useful?
- UNIQUE MOIs- why would an NPC need one of these?
- DISPUTE RESOLUTION CLAUSES- do they belong in founding documents of non-profits?
We hope that you find all of this information useful and, as usual, please feel free to send this on to anyone who you think might benefit from it. If you have been sent this by someone else and would like to receive future Briefs from us, click this link to subscribe ….. If you would rather not be sent these any longer, then please unsubscribe at the end of the email.
BOARD TRAINING IN GOVERNANCE
While we are on the topic of governance, we wanted to mention one of our favourite things that we are able to do again, properly, now that some sorts of gatherings are allowed– training Boards in governance concepts, requirements and how to fulfil their duties.
We find that (wonderful supportive, talented) people who agree to serve on boards often do not know what is expected of them or how to engage with the important work of governance. There are all sorts of things which can go wrong on boards, as we all know, ranging from:
- The disengaged Board: The CEO is doing a fabulous job, everything seems to be running smoothly and this well-fed crowd manages to pretend to have read the board pack and minutes of the previous meeting (which they may have had a short nap during, anyway);
- The ‘getting stuck in’ board, which micro-manages all aspects of the work of the organisation, wearing themselves and the CEO out in the process!
We love to get into a room with a board and take them through what it means to be on the board, what is expected of them and then how they can find fresh ways to keep engaged and supportive in overseeing and supporting the amazing work being done.
We recently had a fabulous time with the board of Singakwenza in Hilton, KZN, and this is what they had to say:
“I just wanted to thank you most sincerely for a fantastic presentation today. You really inspired our Board and made this process so easy to understand for everyone. Your ability to put very complex legal terminology into language that us plebs can comprehend is a real gift!” (Julie Hay, Founder and Director)
“Just to say an enormous thank you for the most outstanding training session on Monday. You brought just the right amount of humour combined with practical theory to make it thoroughly engaging!! Who’d have ever thought that Good Governance could be fun, but somehow you made it so.” (Louise Duys –firstname.lastname@example.org– and Simone Dale –email@example.com-: Strategy & Organisational Resilience Consultants)
Coming soon to a board near you, contact firstname.lastname@example.org to make a booking.
DICTIONARY CORNER: “EX OFFICO”- WHAT DOES IT MEAN?
This (widely misunderstood) term means “by virtue of another office held” and simply means that the person automatically becomes a board member because of some other position they are in.
Those who serve ‘ex officio’ are not voted on, do not resign and are not subject to terms of office, as they are in when they are in the (other) office, and out when they leave.
Please note that the “ex officio” status does not mean that they are non-voting on the board.
If anyone (the CEO, the CFO etc.) is appointed to the board ex officio and the board wants the ex officio board member/s to be non-voting, the founding documents will need to specifically provide for this.
However, we advise that you think through this carefully. Our view is that it is inherently unfair to put someone in a position of responsibility and then not give them the tools they need (their vote) to carry out the responsibility.
If the Execs at the board meetings are not to vote, then we would rather suggest entrenching in the founding document a provision that certain specific (or at least one/two senior execs) attend all board meetings (except the parts of them where their service and performance may be discussed) but stop short of having them appointed to the board.
Executives are appointed by and report to the board and will, if they are also on the board, often struggle with the switching of hats required by these dual roles.
The trend towards including executives on boards ex officio can be traced back to the King governance codes, which support the ‘balanced board’ idea, meaning that there is an equal number of management and non-executives on the board. In our view this is appropriate in the for-profit environment, where all directors are appointed by shareholders and the directors often are shareholders themselves, but careful thought should be given to the issues of accountability and responsibility before applying this principle of King IV to a non-profit.
NPC ADVICE: WHAT IS A ‘UNIQUE MOI’ AND DO WE NEED ONE?
Many NPCS which are registered in a hurry or without any understanding of the importance of the Memorandum of Incorporation (MOI) of an NPC are often established with the CIPC standard form MOI as their founding document.
At ngoLAW we only register with a standard CIPC MOI as a short-term emergency measure when the NPC needs to be registered fast and it is felt that there is not sufficient time for the board to engage with the process of drafting a “unique” MOI. (“Unique” is what the Companies Act calls all MOIs which are registered and which are not in one of the standard formats available online at CIPC).
There are sound legal and governance reasons for using a unique MOI:
- In terms of the new Companies Act, the registered MOI is always the ruling document (the previous Companies Act was different in this respect). This has made board charters (and-for PTYs- shareholders agreements) much less useful as they cannot override the provisions of the registered MOI. Under the previous Companies Act it was standard practice to use a standard-form Memorandum and Articles of Association and then just adopt a Board Charter or other set of rules which usually began with something like:
“In the case of any contradiction between what is in this document and what is in the registered Memo and Articles, the provisions of this document will apply.”
This is no longer possible or useful, as, in the case of any contradiction, the new Companies Act specifically says that provisions of the registered MOI will apply. So, in the case of any dispute about rules or governance processes, the board may be following the internal governance document to the letter but, if they act in contradiction to what is in the registered MOI, then they will be in breach of the actual rules.
In our view, it is far simpler and safer to have a unique MOI properly drafted to reflect the actual ‘ground rules’ of the NPC, than to be continually referring back and forth or righting a contradiction between the MOI and document adopted by the board.
Where it is felt that a board charter is still useful to articulate details of governance structures or processes which are more fluid and will not be entrenched in the MOI, then the MOI needs to be the constant reference point for the Charter, to be sure that they do not contradict each other.
- The standard-form NPC MOIs do not comply with Income Tax Act provisions required to be reflected in the founding documents of tax-exempt organisations. SARS is permitted to and will grant PBO status to an NPC which has a standard form MOI, but (and look at your exempting letter to verify this) the status will be conditional upon the MOI being amended within a certain period (which has, by the time you read this, probably expired. Don’t panic, the exempt status remains in place until SARS tells you otherwise. But you do need a new MOI, and, while you are complying with SARS, we strongly suggest that you have a document crafted which is a useful, readable rule book for governance and which correctly reflects the structures and processes in the organisation.)
- The standard form MOI, as the ruling document of the company, is not a useful guide or reference point for governance of an NPC. It jumps back and forth between topics, is hard to comprehend and follow as a whole, and relies on references to sections of the Companies Act, instead of spelling things out plainly. As we have already advised, a plain language, concise but thorough and appropriate, specially crafted MOI will make everything clearer and easier.
DISPUTE RESOLUTION CLAUSES IN FOUNDING DOCUMENTS
We quite often see standard ‘quick fix’ or arbitration dispute resolution clauses included in founding documents such as trust deeds, MOIs and constitutions.
These dispute resolution clauses originate from contracts, and as a way to try to have people who have signed an agreement resolve matters faster and cheaper, before resorting to tedious and expensive legal process. Whether they are ‘independent expert’ or ‘quick arbitration’ clauses, the idea is that parties with competing views and interests agree to submit to the ruling of the external third party when a dispute arises.
In non-profit organisations which are set up for public benefit, the members (if there are any) and the board participate in the meetings and governance of the organisation in service of the public benefit objects of the organisation. This differs markedly from contractual arrangements or from commercial entities or associations for common purpose, where the members, shareholders or contracting parties are (correctly) servicing their own personal interest, or the interest of a sector which they represent. In these commercial and self-serving contexts, a dispute resolution clause may be useful to broker an agreement between warring parties.
However, the context of those who serve on the board of a public benefit organisation is completely different, as each board member serves the organisation (and its ultimate beneficiaries) and lays aside questions of any personal benefit in service of other. This is the essence of the fiduciary duty – looking after something which is not yours, and therefore board members should not have competing interests to be served, as they should all be (ultimately) pulling in the same direction.
Of course, having the same goal in mind does not mean that all will agree on the best way to achieve that goal, and the allocation of scarce resources where the need is great requires tough decisions to be made. However, where boards cannot reach consensus on the next step to be taken/approved, they can take a vote on it and then the majority decision prevails. If the voting is inconclusive (and if there is no casting vote power in the Chair) then the matter to be decided can either be left so, and not pursued OR there can be some further information-gathering, discussion and some independent research, and the board can convene again with clear heads for a re-vote. This process seems to us to be how the board should be carrying out their duties and vastly preferable to calling in an external ‘expert’ to make a ruling.
In any event:
- We are not certain that a ruling on a decision which should have been taken by a board would be enforceable against the board members, who must all still exercise their discretion and carry out their duties;
- We also think it doubtful that the duty to make the big strategic and oversight decisions which rests with the board is something which can be delegated to another party, since that expert or arbitrator does not have the same relationship of trust which the board does towards the organisation.
In one of the silly examples we sometimes use to demonstrate the essential nature of the fiduciary duty – If your neighbour asks you to feed and take care of their dog while they are away, you can certainly delegate to your child or husband the administration of the duty and ask them to feed the dog on your behalf, but it is still you who is responsible to your neighbour and who must, in the case of any accident or emergency, make the call on whether the dog needs taking to the vet.
In the same way, we feel that a board which is jointly tasked with governing and guiding an organisation should not be able to avoid their essential duty and delegate an important decision to a paid, external arbitrator.
NPO AMENDMENT BILL UPDATE
If this is the first you have heard of it, please follow this link to our October Brief, which has all the details.
The non-profit sector is in ongoing discussions and engagement with the NPO Directorate about the proposed (long overdue) amendment Bill, which can be found here
Although the notice says that comments closed on 31 October 2021, the Directorate is still receiving and taking into consideration all comments submitted. If you are not already part of a group or alliance in communication with the Directorate on this matter, you are welcome to join the Group whose submissions and discussions are being organised through Inyathelo https://www.inyathelo.org.za/ and please email email@example.com
Nothing much is happening on this front, by which we mean that the work of compliance is ongoing, but there has been little to no movement from the Information Regulator, whose website still (almost six months later) says:
In the meanwhile, Information officer registration forms are being emailed to firstname.lastname@example.org.